What is direct tax?

A direct tax is a tax that is paid by an individual or an organization to the imposing entity, or to be precise, Direct Tax is the one which is paid to the Government by taxpayers. These taxpayers include people and organization both. Also, it is directly imposed by the Government and cannot be transferred for payment to some other entity.

With Direct Taxes, especially in a tax bracket system, it can become a disincentive to work hard and earn more money, as more money you earn, the more tax you pay.

The Central Board of Direct Taxes in India

The Central Board of Direct Taxes or the CBDT, which was formed as the result of the Central Board of Revenue Act, 1924 looks after the Direct Taxes in India. This department is part of the Department of Revenue in the Ministry of Finance and is responsible for the administration of the direct tax laws. Besides that, the Central Board of Direct Taxes also provides inputs and suggestions for policy and planning of the direct taxes in India.

Advantages of Direct Taxes

Curbs inflation: The Government will often increase tax when there is inflation. This reduces the demand for goods and services and as a result of descending demand, inflation is bound to compress.

Social and economic balance: On the basis of every individual’s earnings and overall economic situation, the Indian Government has well-defined tax slabs and exemptions in place so that the income inequalities can be balanced out.

Certainty: There is a sense of certainty with respect to direct taxes from the taxpayer and the government, as each know how much to pay and how much to expect to collect respectively.

Productivity: Direct taxes are considered to be very productive, the reason being, as the working population and community grows, so do the returns from direct taxation.

Creates equal distribution of wealth: The money is equally distributed as the Government charges more taxes from the ones who can afford and this money is used for the benefit of the lower and poorer sections of the society.

The Direct Tax Code

The DTC or Direct tax code has been drafted to replace the existing Indian Income Tax Act of 1961. This was done to establish a more efficient, effective and equitable direct tax system. The aim was to stabilize, amend all laws relating to the direct taxes in order to ease voluntary compliance and increase the tax-GDP ratio. With 319 sections and 22 schedules in it, the DTC aims to replace the old Income Tax Act and provide a more stable, well organized and overall better code for taxation.

Following are the Direct Tax Codes explained with examples

Here, the Direct Tax code is explained in this section by delving into its key features. Examples of income tax, corporate tax, wealth tax, and Capital Gains Tax are given below.

A Single code for direct taxes:A single unified taxpayer reporting system can be facilitated by bringing all direct taxes under a single code with unified compliance features.

Flexibility: The law has been created in such a way that can accommodate the changes and requirement of a growing economy without having to constantly resort to amendments.

Stability: With reference to the current system, the taxes are formed in the Finance Act of the relevant year. The rates of taxes under Direct tax code are proposed to be prescribed in the First to the Fourth schedule of the DTC itself. Also, any amendments to the same will be brought before the Parliament as an Amendment Bill.

Eliminates the problem of constant litigation: Special care is taken to avoid ambiguity and contradiction in the code in order to avoid misinterpretation and misuse.

Eliminates regulatory functions: The regulatory functions are to be carried out by other regulatory authorities.

Fringe benefits tax: These are charged to the employee than charging it to the employer.

Political contributions: There are political contributions of up to 5% of the gross total income that will be eligible for deduction.

Types of Direct Taxes in India

The following taxes are imposed directly and applicable to all Indian citizens.

Income Tax

This comes across as the most important and common tax that every Indian must pay.

This tax is directly charged on the income of the person.

The rate at which income tax is charged depends on the level of income.

Also, the different heads of Income under which income tax is chargeable are as follows:

Income from a profession or business

Income from property or house

Income from salaries

Income that is in the form of capital gains

Income from other sources

Note: Income Tax is levied differently for different people depending on their residency status.

Wealth Tax

This tax is charged on the benefits derived from property ownership.

The same property is taxed every year depending on its current market value.

There is no difference for a tax that is levied on the Individuals, HUF’s and companies.

Note: Income tax on wealth is chargeable depending on the residential status

Corporate Tax

Corporate tax is applicable to companies who exist as separate entities from their shareholders.

Foreign companies are also taxed on the income that arises or that is considered to arise in India.

This type of tax is charged on gains from the sale of capital assets located in India, royalties, interest, fees for technical services and dividends.

Corporate tax includes Minimum Alternative Tax (MAT) which was introduced to bring Zero Tax companies under the income tax bracket and whose accounts were made as per the Companies Act.

Fringe benefit (it is an extra benefit supplementing an employee's salary) is included in Corporate tax that is paid by the companies on the fringe benefits provided (or deemed to have been provided) to employees.

Lastly, it also includes Securities Transaction Tax (STT) which is a tax levied on taxable securities transactions. However, there is no surcharge applicable to this.

Capital Gains Tax

Capital gains tax is taxed on the income derived from the sale of assets or investments.